Sony BMG Appeals Joint Venture Annulment

Appeal lodged with European Court of Justice.

Sony Corp. and Bertelsmann today (Oct. 5) appealed against the European Union court decision last July that annulled the merger of their recorded music divisions in 2004.

The appeal was lodged at the EU's top court, the Luxembourg-based Court of Justice. It is the only body capable of overturning the July ruling made by the EU's second-highest court, the European Court of First Instance.

In a statement, Bertelsmann and Sony confirmed their joint appeal. "They did so on the grounds that the European Commission's 2004 Decision to clear the Sony BMG recorded music joint venture was correctly decided on both the law and the facts," the statement said.

In June 2004, the Commission -- the EU's antitrust authority -- unconditionally cleared the plans by the two media giants to merge their respective Sony Music and BMG companies.

However, independent music labels, gathered under the umbrella of trade body Impala, challenged the case at the Court of First Instance. Brussels-based Impala argued that the Commission failed to conduct a thorough investigation of the antitrust implications before clearing the merger.

The merger made Sony BMG the world's second largest music company, behind Vivendi's Universal Music Group. Impala said the amalgamated music group would muscle-out smaller labels and prevent newcomers from breaking into the market. It said the Commission had only made a cursory examination of the potential impact this might have, and failed in its responsibility to study the effect on consumers.

In a surprise move, the judges agreed in July that the Commission decision had been "riddled with errors" and annulled it. They said the Commission failed to show that at the time the then-five music majors were not colluding over market prices or that they would not afterwards.

After the court annulment, the Commission immediately announced it would re-examine the deal, meaning that Sony and BMG have to re-submit their plans for another investigation. It is unclear whether the new bid for a merger will be cleared as the first one was two years ago. But the court decision effectively put on ice any other plans by the music majors for further consolidation: merger initiatives by EMI Group and Warner Music have been shelved.

In its statement, Bertelsmann today added that the court appeal had no direct bearing on the re-notification process - indeed, it is due to send market data and other information to the Commission in the next few weeks. But the German company was bullish about the process. "The parties remain confident that the EU Commission will, following re-notification, issue a second clearance decision," it said.

The appeal could last two years. If the Commission blocks the second bid, and the Court upholds the appeal, it could create a legal quagmire.